By Michael Elkins
Bernstein upgraded McCormick & Co. (NYSE:MKC) to an Outperform rating (From market-perform) with a price target of $90.00 based on a recovery in fundamental performance over the course of 2023. The company remains the strongest in UBS' coverage over the longer term, and valuation looks relatively attractive, even given the tempered outlook for 2023.
McCormick reported 4Q revenues of $1,696 million, -4.0% below consensus estimates. The adjusted gross margin of 36.8% was -225bp below consensus and down -410bp YoY. Adjusted EBIT of $277.9m came in -15.3% below consensus and down -10.0% YoY, while EPS of $0.73 was a -13c miss and down -13.3% YoY.
Bernstein analysts wrote in a note, "Put simply, 2022 was an annus horribilis for MKC. The stock was by far the worst performer of the established U.S. packaged food names driven mainly by negative earnings revisions and as a result the company saw no benefit from the flight to safety that occurred in the wake of Russia's invasion of Ukraine. Of course this was in the wake of incredibly strong fundamental performance during the first couple of years of the pandemic as MKC was perfectly positioned as consumers hunkered down at home and learned how to cook from scratch."
4Q22 saw only 2.9% organic sales growth and gross margins fell by -410bp YOY as negative mix combined with plant closures and operational deleveraging to create a perfect storm. Going forward, the analysts expect $160m in cost savings in 2023 to combine with a catch-up in pricing vs. input costs to create steady sequential improvement in margin trends over the course of the year.
The company expects sales in 2023 to grow by 5-7% vs. consensus of 4.6%. However, adjusted operating income growth is expected to come in at 9-11% which implies 2023 adjusted EBIT of around -6.3% below consensus estimates at the midpoint of guidance. Adjusted EPS is expected to come in between $2.56-$2.61 vs. consensus of $2.90 - almost an 11% shortfall at the midpoint.
Shares of MKC are up 1.32% in pre-market trading on Friday.